Sunday, December 14, 2014

Turnbull's Triumph? Not really.

Christmas has come early for NBN Co and the Minister for Communications Malcolm Turnbull. Not only have they been able to announce the renegotiated deals with Telstra and Optus. The bigger present has been the mostly uncritical adoption of the company’s and the Minister’s messaging.

The AFR took the first prize by heading an Adele Ferguson column “NBN deal is Malcolm Turnbull’s triumph.” Elsewhere in the paper we were advised that “Telstra is primed to win a bigger role building and maintaining the national broadband network under a deal with the government-owned NBN Co.”

We need to just step back from this hype.

Firstly, let’s just note that Mr Turnbull always said the negotiation with Telstra, which started in September 2013, would be concluded quickly. In February this year he said they would be completed by “the middle of the year.”

If taking twice as long to complete the first significant task is a triumph, failure must be spectacular.
And despite descriptions of a “side deal” for Telstra in designing, building and maintaining the network, the reality is that both NBN Co and Telstra have simply said discussions are continuing.
The six month delay might be understandable if that more tricky negotiation was concluded, but it hasn’t been.

The next issue is to consider what Telstra is actually agreeing to. The Telstra announcement is thin on details. While Telstra is “kept whole” there is no detail on whether the specific amounts for duct leases and disconnection payments have changed. For the former we are advised that the payments deliver “equivalent NPV on a simplified basis.” For the latter the announcement merely says “payment construct preserved.”

We do know that NBN Co has taken on some extra costs. The first is a cap on duct remediation costs. The second is that NBN Co will bear the burden of duct remediation and maintenance costs in FTTN and HFC regions.

The announcement is totally silent on what the agreement says about the state of the copper before it is handed over.

It is well known that there are many cables that have suffered damage from a misguided earlier plan to seal the network with gel-filled joints. The gel has reacted with the cable sheath in many places, the only permanent solution of which is a new cable.

These are the joints that are currently ‘protected’ by inclusion in plastic bags.

Outside of the nit-picking on detail, the important point is that Turnbull’s renegotiation was only possible because there was a negotiation in the first place, and that only occurred because of a thing called “strategic commitment.”

Game theorists identify strategy as the move you make taking into account all the possible moves of your opponent. The question then comes down to how your opponent plays his strategy.

A good example is the story of the Optus Pay TV cable (HFC). As the second carrier Optus paid Telstra for access to the copper network for the origination and termination of each long distance call (originally called ingress and egress). Telstra was charging something like 4.5 cents per minute, and Optus thought it should be lower.

So Optus devised a plan to build an HFC network to also carry voice. But Telstra ignored the plan.
Optus then created a joint venture (OptusVision) with Continental Cablevision to build the HFC network. Telstra now realised the threat from Optus was real. Then CEO Frank Blount approached Optus offering to reduce the interconnection price, but by then Optus had a partner who told Optus they couldn’t do a deal because their voice traffic was now committed to the JV.

Telstra’s only response left was to build its own HFC network.

The move by Optus to sign a partner is a case of strategic commitment. An irrevocable act that will convince your opponent you are serious about the strategy.

Back in 2008 Telstra refused to submit its full bid for the original (fibre to the node) NBN unless the Government abandoned its requirement for structural separation. The Government’s advice was that there was no way to force Telstra to hand over its copper, and no rival bidder had a strategy for acquiring it.

The decision to proceed with a fibre to the home network was made on the advice of the Expert Panel and others that FTTN was not a cost-effective pathway to FTTP. However, it had the additional benefit of being a credible commitment the Government could make without needing Telstra’s co-operation.

Announcing the NBN in April 2009 as a decision rather than a plan added to its value as a strategic commitment. In reality it was only a proposal until the Implementation Study was completed in May 2010. It was never really a decision made in a rushed eleven weeks.

It was only when it was faced with this commitment and the proposed separation legislation (that only would have achieved functional separation and restricted Telstra’s mobile growth) that Telstra changed its strategy. They also, as a consequence, changed management.

It was only through these actions that the original negotiations occurred, and hence that Mr Turnbull has been able to conclude this new deal.

Whether it is a good or bad deal is yet to be seen. But so far it is nothing more than a transfer of the copper and HFC assets, though duct ownership stays with Telstra.

Clearly FTTH zealots will see it as a bad deal on principle. But that is a different discussion. NBN Co now presumably has all the information it needs to prepare a properly and fully costed Corporate Plan for MTM. That needs to be released in its entirety without redactions.

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